CINDERELLA’S NEW DRESS: A BETTER ORGANIZATIONAL …

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CINDERELLA'S NEW DRESS: A BETTER ORGANIZATIONAL OPTION FOR CHURCHES

AND OTHER SMALL NONPROFITS

TABLE OF CONTENTS

I. Introduction....................................................................................... 814 II. Overview of Church Polity .............................................................. 815

A. Congregational Polity................................................................. 816 B. Presbyterian Polity...................................................................... 817 C. Hierarchical Polity ...................................................................... 818 III. Organizational Options Currently Available for and/or Commonly Used by Churches in Iowa........................................... 819 A. Unincorporated Associations .................................................... 820 B. Nonprofit Corporations.............................................................. 820 IV. Organizational Options Currently Available for and/or Commonly Used by Churches Outside of Iowa............................ 821 A. Charitable Trusts......................................................................... 822 B. The Corporation Sole ................................................................. 823 C. Unincorporated Nonprofit Association ................................... 823 V. Problems with Available Organizational Options ........................ 828 A. Unincorporated Associations .................................................... 828 B. Corporation Sole......................................................................... 830 C. Charitable Trusts......................................................................... 831 D. Nonprofit Corporations.............................................................. 832

1. Fit ............................................................................................ 833 2. Requirements and Cost ........................................................ 834 3. Iowa's Nonprofit Corporation Act...................................... 835 E. Scarcity of Options and the Free Exercise Clause .................. 836 VI. Possible Solutions ............................................................................. 836 A. Religion Specific Nonprofit Corporation Act ......................... 836 B. Limited Partnership .................................................................... 837 C. Close Corporation....................................................................... 837 D. Change in Wording of the Iowa LLC Act................................ 839 E. New Nonprofit LLC Act ............................................................ 841

813

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F. Uniform Unincorporated Nonprofit Association Act............ 843 VII. Conclusion ......................................................................................... 846

I. INTRODUCTION

In the United States there are more than one thousand religious denominations.1 These religious denominations operate local churches, charities, and various other public service organizations.2 They are supported by people from every walk of life, with over half of the adult population in this country giving to religious organizations.3 Religious organizations, and in particular, churches, provide a large part of the social welfare distributed to those in need.4 These churches and other nonprofit charities make up "a necessary segment of the . . . business world."5 They are a large and important part of our national economy, providing necessary services, and filling important gaps.6 In Iowa alone there are over 27,000 nonprofit charities, of which about 5,000 are church congregations, each one fulfilling a specific need.7

To operate efficiently and effectively, most churches realize the need to have some kind of civil legal structure.8 They must be able to hold property, enter into contracts, receive and make gifts, manage resources, and have legal continuity.9 In spite of the clear importance and prevalence of churches and other nonprofits, there are few legal structure options available to them.10 In Iowa, a church is limited to organizing as a

1.

WILLIAM W. BASSETT, RELIGIOUS ORGANIZATIONS & THE LAW xi

(2006).

2.

Id.

3.

Id. at xi?xii.

4.

Id. at xi?xiii; Catherine M. Knight, Comment, Must God Regulate

Religious Corporations? A Proposal for Reform of the Religious Corporation

Provisions of the Revised Model Nonprofit Corporation Act, 42 EMORY L.J. 721, 721?22

(1993).

5.

Victor B. Flatt, Notice and Comment for Nonprofit Organizations, 55

RUTGERS L. REV. 65, 65 (2002).

6.

See id. at 69.

7.

Nat'l Ctr. for Charitable Statistics, Number of Nonprofit Organizations in

Iowa 1996?2004, (last

visited Mar. 28, 2007) [hereinafter Nat'l Ctr. for Charitable Statistics].

8.

BASSETT, supra note 1, ? 1:16, at 1-53 (listing twelve structures churches

have used for legal organization).

9.

Id. ? 3:1, at 3-10, ? 3:17, at 3-60.

10.

Patty Gerstenblith, Associational Structures of Religious Organizations,

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nonprofit corporation, an unincorporated association, or a charitable trust--with the most common form being the nonprofit corporation.11

Many nonprofit organizations, especially churches, but other small nonprofits as well, do not fit well within the Iowa Nonprofit Corporation Statute.12 This Note will explore the problems associated with requiring churches to organize using one of Iowa's available options, the reasons why a different organizational form is needed, and possible solutions. Part II will describe the various types of church governance, referred to as polity, and illustrate why the available legal structures do not mirror the internal structure of many churches. Part III will analyze the organizational options currently available and commonly used in Iowa. Part IV will look at options available outside of Iowa. Part V will then consider each of these options and explain the problems and issues churches may have when trying to organize under them. Finally, Part VI of this Note will consider possible solutions for Iowa. It will look at legal structures currently in use in other states and evaluate them as possible options for Iowa. Part VI will also evaluate the effectiveness of allowing churches to organize as Limited Liability Companies (LLCs), either under the current LLC Act or through the development of a specific nonprofit LLC Act. Part VI will conclude with a recommendation for adopting the Uniform Unincorporated Nonprofit Association Act in Iowa as the best option for Iowa's churches and other small nonprofits.

II. OVERVIEW OF CHURCH POLITY

The internal organizational framework of a church is called its polity.13 Polity determines the roles of the people involved in the church.14

1995 BYU L. REV. 439, 441 ("[L]egal structures available to religious organizations

include the charitable trust, the unincorporated association, the corporation sole, the

religious corporation, and not-for-profit corporations. However, not all of these legal

structures are available in every state.").

11.

See IOWA CODE ? 504 (2005); see also Gerstenblith, supra note 10, at 441

(noting the options available in other states for churches and other nonprofits "include

the charitable trust, the unincorporated association, the corporation sole, religious

corporation, and not-for-profit corporations").

12.

See, e.g., WAYNE GRUDEM, SYSTEMATIC THEOLOGY: AN INTRODUCTION

TO BIBLICAL DOCTRINE 935 (1994) (stating that the corporate form for churches is in

fact contrary to biblical teaching); Knight, supra note 4, at 723 (explaining that the

Revised Nonprofit Corporation Act assumes a single form of organization is sufficient

for all churches, but that this assumption results in a lack of flexibility and limited

choice).

13.

BASSETT, supra note 1, ? 3:2, at 3-10.

14.

Id.

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A church's polity determines its "means to choose leadership, make corporate decisions and to create, divide, merge or terminate organizations, congregations, institutions and other kinds of their collective societies. [The polity] also provide[s] norms for the administration of the goods and assets of these collectives once formally created."15 A church's polity--its internal decision-making procedures--is faith-inspired, based upon that particular church's interpretation of its sacred text.16

Church governance has traditionally been conducted through three arrangements.17 These are, in order of their degree of local autonomy: congregational, presbyterian, and hierarchical polity.18

A. Congregational Polity

Congregational polity is based on self-governance and autonomy, with full control retained by the local congregation.19 This form of polity is the most democratic in that the members of the congregation elect to "bind themselves together by covenant and choose their own leaders."20 Churches with congregational polity believe that no person or group of persons should have control over the local congregation.21

Under congregational polity, most churches have two officers: pastors and deacons.22 The pastor is considered equivalent to the elder in the New Testament23 and is ordained to minister the ordinances.24 The

15.

Id. ? 3:5, at 3-18.1 to -19.

16.

Id. ? 3:2, at 3-12.

17.

Because the religious background of this country, and particularly this

state, is predominately Christian, that is, religion based upon the Bible or some part or

form of the Bible, this Note will focus on the different polities of these churches.

However, many of the principles discussed and the problems explored will be

applicable to most other religions and even other small nonprofit organizations.

18.

Knight, supra note 4, at 726.

19.

BASSETT, supra note 1, ? 3:3, at 3-16 & n.7 (listing the following churches

that use the congregational model: "the United Church of Christ, Unitarian

Universalists, Disciples of Christ, Baptists, The Society of Friends [Quakers], Churches

of Christ, some Adventist and Lutheran churches, as well as most Jewish

congregations"); see also MILLARD J. ERICKSON, CHRISTIAN THEOLOGY 1089 (2d ed.

1998) ("[T]he local congregation [is] the seat of authority.").

20.

Knight, supra note 4, at 727.

21.

CHARLES C. RYRIE, A SURVEY OF BIBLE DOCTRINE 147 (1972).

22.

Id.

23.

See 1 Peter 5 (describing the role of elders in the church).

24.

RYRIE, supra note 21, at 147.

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deacons are to serve the church by supervising its welfare.25 Though the pastor(s) and deacons make some decisions regarding the church through delegation,26 almost all major decisions are made by the whole congregation through a vote.27 This type of church polity has difficulty fitting under the Iowa Nonprofit Corporation Act because congregational polity rejects the concept of a board of directors and officers, other than the pastor and deacons. Because the members of the congregation make the decisions, a congregational church has difficulty drafting its organizational documents in such a way as to avoid giving too much authority to the board.

B. Presbyterian Polity

In presbyterian polity, the local congregations are somewhat autonomous, but each elects representatives to a governing body that makes decisions regarding doctrine and, in some cases, the appointment of pastors.28 Also known as federalism or federal polity, this structure can occur at either the local congregational level or at a higher level within a denominational structure.29 At the local level, under federal polity, the church is governed by a board of elders who are elected by and receive authority from the congregation.30 The elders are representatives of the people; the congregation, therefore, governs indirectly through the elders.31 At the denominational level, individual churches relinquish some of their autonomy to the higher organizational structure.32

25.

Id.

26.

CHARLES CALDWELL RYRIE, BASIC THEOLOGY 408 (1986).

27.

ERICKSON, supra note 19, at 1091; RYRIE, supra note 21, at 147; see also

GRUDEM, supra note 12, at 928.

28.

BASSETT, supra note 1, ? 3:3, at 3-16 to -17 (noting examples of churches

that use this type of polity: Presbyterian Church, Reformed Church of America,

Evangelical and Reformed Church, and the Christian Reformed Church); see also

GRUDEM, supra note 12, at 925?26 (outlining the composition and authority structure

of the presbyterian arrangement).

29.

RYRIE, supra note 26, at 409?10.

30.

RYRIE, supra note 21, at 146.

31.

Id.

32.

RYRIE, supra note 26, at 410. The Presbyterian and Reformed

denominations are good examples of federalism at the denominational level. Id.

These denominations have synods, presbyteries, and general assemblies. Id.; see also

Knight, supra note 4, at 726?27 (explaining the structure of the Presbyterian Church

with its ruling elders, sessions, presbyteries, synods, and General Assembly). Many

independent Bible churches use federalism, but its use is limited to the local church and

does not extend to any higher level organization. RYRIE, supra note 26, at 410.

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